Punitive Damages Affirmed in Tennessee Fraud Case

In Overton v. Westgate Resorts, LTD., L.P., No. E2014-00303-COA-R3-CV (Tenn. Ct. App. Jan. 30, 2015), the Court of Appeals recently affirmed a punitive damage award in a fraud and misrepresentation case. Plaintiffs had traveled to Gatlinburg to look for and purchase a timeshare. Their primary concern was being able to accommodate their extended family for a trip the same week each December. While in downtown, they saw a Westgate booth and made arrangements to attend a presentation. According to plaintiffs, the presentation was “high pressure” and salespeople spent almost eight hours with plaintiffs on the relevant day. Plaintiffs found a unit that would fit their needs and decided to purchase the timeshare from Westgate.

Plaintiffs asserted that their decision to purchase was based on assurances from the Westgate salespeople. Specifically, the Westgate representatives stated that plaintiffs would be able to retain the unit they looked at for the same week in December each year; that they would be able to book unlimited additional nights at any Westgate resort at a promotional price; that the two salespeople they worked with would refund part of their commission; and that the salespeople would purchase a foosball table to be kept at the resort for plaintiffs to use during their stays. The agreements regarding the commission and foosball table were put in writing, but the other two were not. Plaintiffs closed on the timeshare at 11:00 pm that night and were given copies of their closing documents and three CD-ROMs. The purchase price was just under $40,000.

After closing, plaintiffs tried to confirm their December reservation, and after some unsuccessful attempts were informed that the booking would not be guaranteed for the unit they had looked at and that units were not assigned until a few days before arrival. After speaking to several customer service individuals, they also found out that they did not have the ability to book unlimited nights at other resorts as described during the presentation. Plaintiffs retained counsel, who realized that plaintiffs had not been given a current copy of the Westgate’s public offering statement, as required by the Tennessee Consumer Protection Act. Instead, plaintiffs had received an old version on CD-ROM which was extremely difficult to access and navigate. Plaintiffs sought to rescind the contract based on the TCPA, but Westgate refused. Plaintiffs then brought this action.

The trial court determined that Westgate had committed fraud, misrepresentation, and violations of the TCPA and Tennessee Time-share Act. The trial court awarded plaintiffs $600,000 in punitive damages, “finding the most significant factors to be Westgate’s financial position and the reprehensibility of its conduct.” Westgate appealed, and the Court of Appeals focused largely on the appropriateness of the punitive damage award in its opinion.

The Court rather quickly affirmed that punitive damages were available in this case, as Westgate had engaged in intentional, fraudulent conduct and had willfully violated the TCPA. The Court moved on, then, to address Westgate’s argument that the punitive damages awarded were excessive. Westgate argued that because it was “approximately sixteen times the amount of the compensatory damage award,” the punitive damages were unconstitutionally disproportionate. The Court of Appeals, however, looked to the Hodges factors and BMW factors to affirm the appropriateness of the punitive award. Hodges v. S.C. Toof & Co., 833 S.W.2d 896 (Tenn. 1992); BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996). The Court noted that the trial court properly considered all Hodges factors, finding the first two factors regarding Westgate’s financial position and the reprehensibility of its conduct most important. The trial court found that it would take a large financial award to make Westgate “feel it,” and that Westgate’s actions had been “exceedingly reprehensible, due to the fact that Westgate made intentional misrepresentations to [plaintiffs], willfully violated the Tennessee Time-share Act, and refused to rescind the contract despite statutory provisions supporting such rescission.” The Court also pointed out that the trial court had considered the three factors outlined in BMW, one of which is the ratio between punitive damages and actual harm, which Westgate asserted was improper here. The Court of Appeals, however, determined that they did not find “the ratio of punitive damages to compensatory damages in this case to run afoul of due process concerns.” Accordingly, the Court held that “the punitive damages award of $600,000 was reasonable, based on applicable factors, and supported by a ratio within a constitutionally acceptable range.”

After affirming the appropriateness of the award, however, the Court determined that punitives here were subject to the $500,000 cap in Tenn. Code Ann. § 29-39-104. This cap took effect on October 1, 2011, and though the timeshare purchase occurred before that date, the Court ruled that plaintiffs were not injured until Westgate refused to rescind the contract, which occurred in November 2011. Accordingly, the punitive damages here were reduced to $500,000.

In what appeared to be a final effort to avoid this large penalty, defendants also tried to assert that a forum selection clause in the contract should have been enforced, forcing the litigation to occur in Florida. The Court summarily dismissed this argument, noting that “fraud in the underlying transaction renders a contract clause, such as the forum selection clause at issue here, unenforceable.”

The Court of Appeals correctly affirmed the punitive damage award. If punitive damages are constantly limited by strict numerical ratios, their usefulness and purpose will be undermined. Large companies with huge profits, such as the defendant here, would be extremely difficult to “punish,” as compensatory damages may be quite low in many cases. Where the conduct is highly reprehensible and the financial position of the defendant is great, trial courts need the ability to impose punitive damages that will actually have an affect on wrongdoers.

This is the first case that has applied the punitive damages cap that became a part of our law in 2011. The law about when a cause of action accrues in a fraud case, established to actually help protect a plaintiff’s rights, harmed the plaintiff here because it triggered application of the cap. I don’t know enough about the underlying facts to know if I agree with this part of the Court of Appeals holding.

That said, however, I am not sure why the appropriateness of the amount of the punitive damage award was analyzed under the common law factors given the decision that the tort reform act limited the punitive damages in the case. True, the Court of Appeals cited that portion of the tort reform statute that says when punitive damages can be awarded and what factors may be considered but it then went on to analyze the statute looking at the common law factors articulated in Hodges. To be sure, this a "no harm, no foul" result – the factors in the statute track the Hodges factors, but if the Court of Appeals was going to apply the tort reform statute to analyze a portion of the punitive damage award (whether the cap should apply) it seems that it would also be appropriate to analyze the entire award under the same statute.

Finally, one brief comment about the decision not to give Plaintiffs an award of attorney’s fees on appeal. The issue wasn’t really discussed – the Court said that it was not addressing the issue given the size of the punitive damage award. With all due respect to the Court of Appeals, I don’t understand this point of view. The Plaintiffs’ lawyer, who probably had this case on a contingent fee, does not get paid additional money for writing a brief and arguing the case even though the appeal was largely successful? If I had to guess, it took $30,000 – $50,000 in attorney time to handle this appeal. The Plaintiffs’ lawyer has to eat this time because he or she got a great result in the trial court affirmed on appeal? That makes no sense to me.

Now, it is true that the fee agreement with the Plaintiffs may have called for an increased fee in the event of an appeal. If so, the Plaintiffs’ lawyer got paid the bargained-for amount of the work done of appeal, but it cost the Plaintiffs additional money – the cost of which should have been shifted to the defendants under the TCPA.

All of which goes back to my ongoing rant about how our courts view issues about attorneys’ fees. The cost of running a law office is huge. The cost of preparing and arguing an appeal – if one truly does what he or she is supposed to do – is significant. These economic realities need to be taken into account when analyzing requests for fee awards under fee-shifiting statutes.